Wheeling steel's Ferris wheel -- can he turn a profit now?

October 18, 1985

By Barbara BradleyStaff writer of The Christian Science Monitor

Boston

In his first month on the job, George Ferris, chief executive officer of Wheeling-Pittsburgh, has socialized with steelworkers, danced with secretaries, and may have brought an end to the first big steel strike in 26 years. Whether such gestures can turn the company's idle steel mills into moneymaking machines is another question.

Mr. Ferris, who started his career shoveling molten slag at a Detroit steel mill and ended up running it, ``has the personality best suited to soothe the ruffled feathers'' at Wheeling-Pittsburgh, says M. P. (Butch) Wojtowicz, vice-president of operations at Rouge Steel, a subsidiary of the Ford Motor Company.

Mr. Wojtowicz worked with Ferris when the latter headed Rouge. When business wasn't going well at Rouge, Wojtowicz recalls, Ferris ``would call together a group of guys, talk to them, and by the time he finished, people would be clawing to get back on the job. He made them feel good about themselves. . . .

``But the problems of the steel industry are so complex that [Wheeling-Pittsburgh] will need more than one dimension'' to get out of bankruptcy and start turning a profit, he says.

Indeed, Ferris has his work cut out for him. True, under his stewardship the company has reached a tentative agreement with the United Steelworkers negotiators to end the strike that started July 21. It has wrung out a deal with the union whereby the company's labor costs would fall by 16 percent. The $18-an-hour rate, which can rise to $19 if steel prices and cash flow increase, gives the beleaguered company a hefty advantage over the rest of the industry, which pays between $22 and $24 an hour.

True, the company got the unions to accept up to 1,400 layoffs (for cash bonuses equal to a year's salary over two years), and to give up its federally backed pension plan. That should save the company $57 million a year.

And true, he's done all this and still union spokesman Gary Hubbard says, ``If every CEO had the same approach to labor relations, the steel industry would never have gotten into the fix it's in.''

But there remain many unanswered questions about Wheeling-Pitt's short- and long-term viability. Questions like: Can he dissuade the creditor banks from filing to liquidate the company at the end of the month, as they have threatened? Can the union negotiators persuade the 19 local unions, who as of this writing were divided on the issue, to accept the agreement? Can Wheeling-Pitt win back the confidence of its customers that it is in the steel business to stay?

More fundamentally, is even $18 an hour too high a wage rate for the company to turn a profit? If other steel companies get similar wage cuts when they begin negotiating with their unions next spring, will Wheeling-Pitt find itself in the same uncompetitive boat that landed it in bankruptcy court? And is saving the company the best thing for the steel industry?

On this last point, Charles Bradford, a steel analyst at Merrill Lynch, lodges an emphatic ``no.'' For the industry to survive, he says, it must cut back production (by closing plants) by 20 to 30 million tons a year. (US companies now produce about 74 million tons.) Besides Wheeling-Pitt, Merrill Lynch estimates that six other mills should close, although Mr. Bradford would not identify them.

As it is, he says, consumption of American steel is dropping by 2 percent a year, which translates into a mill closing about every 18 months. Closing uncompetitive mills would allow those that remain to raise their operating rates, thus lowering their costs and enabling them to offer prices competitive with foreign competition.

At present foreign countries, mainly South Korea, Brazil, and Japan, supply 28 percent of all steel used in the United States. In 1984, hourly wage rates in those countries were, respectively, $2.15, $1.63, and $11.32, vs. $20.24 in the US, according to the Bureau of Labor Statistics.

Not everyone thinks Wheeling-Pittsburgh should close. ``It's difficult to let several hundred million dollars of relatively new equipment go down the drain,'' says Frank Cassell, a professor at Kellogg School of Management of Northwestern University. ``A change in management, a more efficient use of the work force, and a drop in unit costs . . . give the company an opportunity to produce a fairly competitive product,'' he says.

Wheeling-Pitt, the No. 7 steelmaker, does have relatively modern (about 10 years old) equipment next to other mills, most of which are more than than 30 years old. But Bradford says that while the company has installed modern continuous casting equipment, its rolling equipment, which determines the steel's quality, is old. ``So they're helped on the cost side, but not on the quality side,'' he says, which will keep Wheeling-Pitt uncompetitive with better foreign products.

Analysts are divided whether the tentative agreement, if it is accepted by the bankruptcy judge overseeing the case, the banks, and the local unions, will set a precedent for the rest of the industry. Bradford thinks other firms will ``absolutely'' demand the same concessions. John E. Jacobson, director of Chase Econometrics Steel Service, disagrees.

``This won't create a lot of jubilation among the rest of the steel companies,'' he says. Even concessions in other companies ``won't put them in clear-sailing mode, [since] it still leaves domestic integrated producers with a significant premium over mini-mills and foreign competitors.''

Left in the middle of all this are the steelworkers, whose skills are not readily transferable. ``It's easy to sit on Wall Street and say, `Oh, we're going through this difficult transition and the steelworkers will have to learn how to run computers,' '' says Hubbard. But it just doesn't happen that way, he says. CHART: How much it costs to produce a ton of steel (1984) United States $143.70 Japan 66.50 European Community 56.57 South Korea 8.64 Source: Chase Econometrics

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